Wednesday, April 14, 2010

Small Bras and the Value-Added Tax by Irwin Stelzer

...The tax sounds simple, but don't be fooled. Because both upper- and lower-income families pay the tax at an equal rate, the VAT is considered regressive; that is, it hits the poor harder than the better-off. So it is the practice in countries such as Britain to exempt food, which lower-income families spend a greater proportion of their income on. The technical term is "zero rating," meaning that exempt items are taxed at a "zero rate."

However, wait until the folks at the IRS get their hands on the regulations for the application of the new tax. They will undoubtedly turn to their more experienced British counterparts for guidance.

"Food of the kind used for human consumption," to a British bureaucrat, is something "the average person, knowing what it is and how it is used, would consider it to be food or drink; and it is fit for human consumption. . . . The term includes . . . products like flour, which, although not eaten by themselves, are generally recognized food ingredients . . . [but] would not usually include . . . dietary supplements, food additives and similar products, which, although edible, are not generally regarded as food."We should be reminded that the countries with VATs also have enormous government debt and high unemployment. It is a hidden tax that is not subject to public scrutiny. Time and again we have seen, the more money the government gets, it spends even more. And let it not be lost on us just how much power this confers upon the government with respect to what products will be manufactured and how. Dr. Stelzer continues:...This process of writing regulations for the VAT man when he cometh is more than merely amusing. For one thing, it confers enormous power on faceless bureaucrats.

They can hand a competing product the advantage in the U.K. of a price 17.5% lower (in Sweden it's 25%) than a close substitute. That invites both lobbying and corruption and sheer, inexplicable arbitrariness. Get your "sweetened dried fruit" deemed to be "held out for sale as snacking and home baking" and your product will bear a tax and have to compete on grocers' shelves with zero-rated "sweetened dried fruit held out for sale as confectionery/snacking." Peddle your sandwiches "as a general grocery item" and consumers pay no tax, but offer them as "part of a buffet service" and the VAT man wants his 17.5%.

Manufacturers twist and turn and juggle their product specifications and processes, not to find the most efficient way of making things but the surest way of obtaining a zero rating. The resulting inefficiencies cannot be measured accurately, but they certainly contribute to Europe's lagging productivity and increasing inability to compete in world markets.We don't need this in the United States. Once again, this is about enhancing government power and nothing else. It will increase the price of products, lower the amount of choices and thus make us all live poorer and more dependent upon the government -- which is the ultimate object, of course.